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In this annual report, you will find our financial statements for 1997, the report of independent accountants, our year-end portfolio holdings, and summary financial information for the Company.
The Year in Review
The pickup in growth of the U.S. economy in 1997 from the 2.8% pace in the prior year to about 3.8% came as a surprise to most observers. After a strong finish in 1996, real gross domestic product (GDP) growth accelerated in the first quarter to a seemingly unsustainable 4.9% quarter to quarter. Though inflation remained at a low level, the Federal Reserve Board took action to raise short-term interest rates in March, fearful of the potential effects of strong growth and low unemployment on the inflation rate. While the economy normally takes from six to nine months to respond to an interest rate change, growth slowed to 3.3% in the second quarter of the year. This was due almost exclusively to a slowdown in final demand, as the work force and industrial production continued to grow in the quarter. With a pickup in demand in the final half of the year, GDP accelerated a bit, with final year over year growth of approximately 3.8%. Importantly, despite this strong growth and an unemployment rate under 5%, signs of wage-related pressure on the inflation rate have not appeared.
The restructuring and downsizing which have characterized the industrial sector for the past several years continued in 1997, though at a slower pace. With much of the excess wrung out of operations, managements focused on outsourcing overhead items. In addition, there has been a wave of mergers, joint ventures and acquisitions across many industries, as companies have sought economies of scale or strategic advantages. Notable among these have been the banking, energy, health care and technology industries. Deregulation has also sparked changes in the telecommunications and electric utility industries, with much more to come in the next several years. The net results have been strong growth in capital spending and only a modest deceleration in the growth of corporate profits to about 8%, despite overall sales growth of only 3% or so. The to-be-reported earnings for 1997 of Standard & Poor's Composite of 500 companies, however, are expected to have grown by approximately 11%, slightly more than in 1996.
Consumer spending in 1997 continued to reflect the modest gains realized in wages and income during the year. While sentiment about the outlook improved through the year, people increased their savings rate rather than spending. This is apparent in statistics on housing starts, automobile sales and retail chain sales, all of which experienced modest growth at best.
For much of the year, the stock market traced the level of economic activity in this country. The market's upward surge of the first quarter was brought to a halt by the action of the Federal Reserve on March 25 but resumed in April when leading indicators registered a slowdown in projected economic growth. The expectation of less growth drove investors into more defensive stocks, which have historically fared better during periods of lower growth. The steady flow of money into mutual funds and individual investor action served to drive the valuations of many of these stocks to new record highs. In August, investors began to realize that the Asian monetary and economic problems were going to impact U.S. companies, especially the large multinationals which had been in favor for several years. This became apparent in October when third quarter earnings reports and pre-release announcements gave details of the effects. The rout on October 27 was followed by an immediate bounce as investors once again "bought the dip." As a result, the performance of the popular indices was better for the month of October than it was for August. The year concluded with another gain in excess of 20%, the first time the stock market has ever had such gains three years in a row.
The stocks in the Adams Express portfolio have continued to provide our shareholders with an excellent return in 1997. With a majority of our holdings in large-capitalization, multinational companies, we benefited from investment trends in the first half. In more recent months, some individual stocks have been overly depressed due to their perceived Asian exposure, but in general the portfolio has done well. Outstanding returns were provided by our bank, consumer staples, and health care holdings, while our investments in basic materials and technology had good returns relative to their industry sectors.
For the twelve months of 1997, the return on net assets of The Adams Express Company, including income and capital gains distributions, was 30.7% compared to a return of 33.3% for the Standard & Poor's 500. On the basis of market prices, the fund's return was greater, at 33.1%, due to the narrowing of the discount of the market price of Adams Express stock from 16.7% at the beginning of the year to 15.2% at year-end. Our year-end holdings of cash and short-term investments stood at 1.9% of net assets compared to 4.7% of assets a year ago.
Investment Results
At the end of 1997 our net assets were $1,424,170,425 or $28.51 per share on 49,949,239 shares outstanding as compared with $1,138,760,396 or $23.71 per share on 48,036,528 shares outstanding a year earlier.
Net investment income for the year 1997 was $20,784,601 compared to $24,237,044 for the year 1996. These earnings are equal to $0.43 and $0.52 per share, respectively, on the average number of shares outstanding throughout each year.
Net realized gains amounted to $71,696,127 during the year, while the unrealized appreciation on investments increased from $422,449,125 at December 31, 1996 to $665,179,036 at year end.
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